SOLAREDGE TECHNOLOGIES, INC. 10-Q

ITEM 1. FINANCIAL STATEMENTS SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except per share data) March 31, 2022 December 31, 2021 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,002,772 $ 530,089 Marketable securities 158,557 167,728 Trade receivables, net of allowances of $ 3,226 and $ 2,626 , respectively 676,820 456,339 Inventories, net 432,504 380,143 Prepaid expenses and other current assets 191,664 176,992 Total current assets 2,462,317 1,711,291 LONG-TERM ASSETS: Marketable securities 449,673 482,228 Deferred tax assets, net 31,205 27,572 Property, plant and equipment, net 473,511 410,379 Operating lease right-of-use assets, net 59,783 47,137 Intangible assets, net 55,734 58,861 Goodwill 127,109 129,629 Other long-term assets 23,583 24,963 Total long-term assets 1,220,598 1,180,769 Total assets $ 3,682,915 $ 2,892,060 The accompanying notes are an integral part of the condensed consolidated financial statements. F - 1 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Cont.) (in thousands, except per share data) March 31, 2022 December 31, 2021 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Trade payables, net $ 241,630 $ 252,068 Employees and payroll accruals 84,309 74,465 Warranty obligations 82,340 71,480 Deferred revenues and customers advances 25,511 17,789 Accrued expenses and other current liabilities 134,951 109,379 Total current liabilities 568,741 525,181 LONG-TERM LIABILITIES: Convertible senior notes, net 622,263 621,535 Warranty obligations 210,326 193,680 Deferred revenues 158,734 151,556 Finance lease liabilities 53,405 40,508 Operating lease liabilities 48,480 38,912 Other long-term liabilities 10,441 10,649 Total long-term liabilities 1,103,649 1,056,840 COMMITMENTS AND CONTINGENT LIABILITIES STOCKHOLDERS’ EQUITY: Common stock of $ 0.0001 par value - Authorized: 125,000,000 shares as of March 31, 2022 and December 31, 2021; issued and outstanding: 55,386,146 and 52,815,395 shares as of March 31, 2022 and December 31, 2021, respectively 6 5 Additional paid-in capital 1,373,405 687,295 Accumulated other comprehensive loss ( 46,067 ) ( 27,319 ) Retained earnings 683,181 650,058 Total stockholders’ equity 2,010,525 1,310,039 Total liabilities and stockholders’ equity $ 3,682,915 $ 2,892,060 The accompanying notes are an integral part of the condensed consolidated financial statements. F - 2 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except per share data) Three Months Ended March 31, 2022 2021 Revenues $ 655,080 $ 405,489 Cost of revenues 476,122 265,415 Gross profit 178,958 140,074 Operating expenses: Research and development 66,349 46,977 Sales and marketing 35,316 26,911 General and administrative 26,429 19,849 Other operating expenses - 2,209 Total operating expenses 128,094 95,946 Operating income 50,864 44,128 Financial expense, net ( 5,449 ) ( 6,097 ) Income before income taxes 45,415 38,031 Income taxes 12,292 7,955 Net income $ 33,123 $ 30,076 Net basic earnings per share of common stock $ 0.62 $ 0.58 Net diluted earnings per share of common stock $ 0.60 $ 0.55 Weighted average number of shares used in computing net basic earnings per share of common stock 53,134,937 51,726,998 Weighted average number of shares used in computing net diluted earnings per share of common stock 56,315,193 55,997,136 The accompanying notes are an integral part of the condensed consolidated financial statements. F - 3 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (in thousands, except per share data) Three Months Ended March 31, 2022 2021 Net income $ 33,123 $ 30,076 Other comprehensive loss, net of tax: Net change related to available-for-sale securities ( 9,506 ) ( 1,185 ) Net change related to cash flow hedges ( 680 ) ( 128 ) Foreign currency translation adjustments on intra-entity transactions that are of a long-term investment nature ( 6,983 ) ( 3,675 ) Foreign currency translation adjustments, net ( 1,579 ) ( 5,630 ) Total other comprehensive loss ( 18,748 ) ( 10,618 ) Comprehensive income $ 14,375 $ 19,458 The accompanying notes are an integral part of the condensed consolidated financial statements. F - 4 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (in thousands, except per share data) Accumulated Common stock Additional paid in other comprehensive Number Amount Capital loss Retained earnings Total Balance as of January 1, 2022 52,815,395 $ 5 $ 687,295 $ ( 27,319 ) $ 650,058 $ 1,310,039 Issuance of Common Stock upon exercise of stock-based awards 270,751 * - 1,478 - - 1,478 Stock based compensation expenses - - 34,107 - - 34,107 Issuance of common stock in a secondary public offering, net of underwriters' discounts and commissions of $ 27,140 and $ 834 of offering costs 2,300,000 1 650,525 - - 650,526 Other comprehensive loss adjustments - - - ( 18,748 ) - ( 18,748 ) Net income - - - - 33,123 33,123 Balance as of March 31, 2022 55,386,146 $ 6 $ 1,373,405 $ ( 46,067 ) $ 683,181 $ 2,010,525 * Represents an amount less than $1. Accumulated Common stock Additional paid in other comprehensive Number Amount Capital income (loss) Retained earnings Total Balance as of January 1, 2021 51,560,936 $ 5 $ 603,891 $ 3,857 $ 478,004 $ 1,085,757 Cumulative effect of adopting ASU 2020-06 - - ( 36,336 ) - 2,884 ( 33,452 ) Issuance of Common Stock upon exercise of stock-based awards 405,239 * - 5,008 - - 5,008 Stock based compensation expenses - - 23,153 - - 23,153 Other comprehensive loss adjustments - - - ( 10,618 ) - ( 10,618 ) Net income - - - - 30,076 30,076 Balance as of March 31, 2021 51,966,175 $ 5 $ 595,716 $ ( 6,761 ) $ 510,964 $ 1,099,924 * Represents an amount less than $1. The accompanying notes are an integral part of the condensed consolidated financial statements. F - 5 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands, except per share data) Three Months Ended March 31, 2022 2021 Cash flows from operating activities: Net income $ 33,123 $ 30,076 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, plant and equipment 9,002 6,887 Amortization of intangible assets 2,658 2,391 Amortization of debt discount and debt issuance costs 728 724 Amortization of premium and accretion of discount on available-for-sale marketable securities, net 2,550 1,295 Stock-based compensation expenses 34,107 23,153 Deferred income taxes, net ( 1,034 ) ( 2,141 ) Loss (gain) from sale and disposal of assets ( 410 ) 2,147 Exchange rate fluctuations and other items, net 3,024 13,303 Changes in assets and liabilities: Inventories, net ( 51,323 ) ( 8,376 ) Prepaid expenses and other assets ( 17,163 ) 20,218 Trade receivables, net ( 224,865 ) ( 57,380 ) Trade payables, net ( 28,045 ) ( 39,034 ) Employees and payroll accruals 9,246 7,477 Warranty obligations 27,629 13,088 Deferred revenues and customers advances 15,029 3,615 Other liabilities, net 22,755 6,640 Net cash provided by (used in) operating activities ( 162,989 ) 24,083 Cash flows from investing activities: Proceed from sales and maturities of available-for-sale marketable securities 53,096 40,450 Purchase of property, plant and equipment ( 43,210 ) ( 24,545 ) Investment in available-for-sale marketable securities ( 26,712 ) ( 186,528 ) Withdrawal from bank deposits, net - 16,470 Other investing activities 1,692 571 Net cash used in investing activities $ ( 15,134 ) $ ( 153,582 ) The accompanying notes are an integral part of the condensed consolidated financial statements. F - 6 SOLAREDGE TECHNOLOGIES INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Cont.) (in thousands, except per share data) Three Months Ended March 31, 2022 2021 Cash flows from financing activities: Proceeds from secondary public offering, net of issuance costs 650,526 - Proceeds from exercise of stock-based awards 1,478 5,008 Proceeds (withholdings) from stock-based awards, net 822 ( 6,724 ) Other financing activities ( 491 ) ( 346 ) Net cash provided by (used in) financing activities 652,335 ( 2,062 ) Increase (decrease) in cash and cash equivalents 474,212 ( 131,561 ) Cash and cash equivalents at the beginning of the period 530,089 827,146 Effect of exchange rate differences on cash and cash equivalents ( 1,529 ) ( 10,428 ) Cash and cash equivalents at the end of the period $ 1,002,772 $ 685,157 Supplemental disclosure of non-cash activities: Right-of-use asset recognized with corresponding lease liability $ 27,248 $ 1,745 The accompanying notes are an integral part of the condensed consolidated financial statements. F - 7 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 1: GENERAL a. SolarEdge Technologies, Inc. (the “Company”) and its subsidiaries design, develop, and sell an intelligent inverter solution designed to maximize power generation at the individual photovoltaic (“PV”) module level while lowering the cost of energy produced by the solar PV system and providing comprehensive and advanced safety features. The Company’s products consist mainly of (i) power optimizers designed to maximize energy throughput from each and every module through constant tracking of Maximum Power Point individually per module, (ii) inverters which invert direct current (DC) from the PV module to alternating current (AC) including the Company’s future ready energy hub inverter which supports, among other things, connection to a DC- coupled battery for backup capabilities, (iii) a remote cloud-based monitoring platform, that collects and processes information from the power optimizers and inverters to enable customers and system owners, to monitor and manage the solar PV system (iv) a residential storage and backup solution which includes a company designed and manufactured lithium-ion DC-coupled battery that is used to increase energy independence and maximize self-consumption for homeowners including a battery, and (v) additional smart energy management solutions. The Company and its subsidiaries sell products worldwide through large distributors, electrical equipment wholesalers, as well as directly to large solar installers and engineering, procurement and construction firms. b. The Company has expanded its activity to other areas of smart energy technology organically and through acquisitions. The Company now offers a variety of energy solutions, which include lithium-ion cells, batteries and energy storage systems (“Energy Storage”), full powertrain kits for electric vehicles, or EVs (“e-Mobility”), uninterrupted power supply solutions or UPS (“Critical Power”), as well as automated machines for industrial use (“Automation Machines”). c. Basis of Presentation: The unaudited condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). In management’s opinion, the unaudited condensed consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. The Company’s interim period results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. The significant accounting policies applied in the annual consolidated financial statements of the Company as of December 31, 2021, contained in the Company’s Annual Report on Form 10-K filed with the SEC on February 22, 2022, have been applied consistently in these unaudited interim condensed consolidated financial statements. d. Use of estimates: The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures in the accompanying notes. The duration, scope and effects of the ongoing Covid-19 pandemic and the conflict in Ukraine, government and other third-party responses to it, and the related macroeconomic effects, including to the Company’s business and the business of the Company’s suppliers and customers are uncertain, rapidly changing and difficult to predict. As a result, the Company’s accounting estimates and assumptions may change over time in response to this evolving situation. Such changes could result in future impairments of goodwill, intangibles, long-lived assets, inventories, incremental credit losses on receivables and available-for-sale marketable debt securities, or an increase in the Company’s insurance liabilities as of the time of a relevant measurement event. e. Concentrations of supply risks: The Company depends on two contract manufacturers and several limited or single source component suppliers. Reliance on these vendors makes the Company vulnerable to possible capacity constraints and reduced control over component availability, delivery schedules, manufacturing yields, and costs. F - 8 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 1: GENERAL (Cont.) As of March 31, 2022, and December 31, 2021, two contract manufacturers collectively accounted for 20.9 % and 27.9 % of the Company’s total trade payables, net, respectively. During 2020, the Company began commercial shipments from its manufacturing facility in the North of Israel, “Sella 1”. During the second quarter of 2021, Sella 1 reached full manufacturing capacity. f. New accounting pronouncements not yet adopted: From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("FASB") or other standard setting bodies are adopted by the Company as of the specified effective date. The Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption. g. Recently issued and adopted pronouncements: In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805). This ASU requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. At the acquisition date, the acquirer applies the revenue model as if it had originated the acquired contracts. The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Adoption of the ASU should be applied prospectively. Early adoption is also permitted, including adoption in an interim period. The Company elected to early adopt ASU 2021-08 on January 1, 2022, and will apply this new guidance to all business combinations consummated subsequent to this date. Currently this ASU has no material impact on our consolidated financial statements. In November 2021 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. Under ASU 2021-10, the accounting entities with transactions with a government that are accounted for by analogy to a grant or contribution accounting model are required to annually disclose certain information regarding the transaction including: (i) nature and related accounting policy used; (ii) line items on the balance sheet and income statement affected by the transactions; (iii) amounts applicable to each line item; and (iv) significant terms and conditions. This guidance is effective for financial statements issued for annual periods beginning after 15 December 2021. The adoption of this ASU will have a minor impact on the disclosures to the annual consolidated financial statements. h. Certain prior period amounts have been reclassified to conform to the current period presentation. F - 9 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 2: MARKETABLE SECURITIES The following is a summary of available-for-sale marketable securities as of March 31, 2022: Amortized cost Gross unrealized gains Gross unrealized losses Fair value Available-for-sale – matures within one year: Corporate bonds $ 154,930 $ - $ ( 882 ) $ 154,048 Governmental bonds 4,528 - ( 19 ) 4,509 159,458 - ( 901 ) 158,557 Available-for-sale – matures after one year: Corporate bonds 453,220 - ( 16,507 ) 436,713 Governmental bonds 13,428 - ( 468 ) 12,960 466,648 - ( 16,975 ) 449,673 Total $ 626,106 $ - $ ( 17,876 ) $ 608,230 The following is a summary of available-for-sale marketable securities as of December 31, 2021: Amortized cost Gross unrealized gains Gross unrealized losses Fair value Available-for-sale – matures within one year: Corporate bonds $ 160,462 $ 23 $ ( 320 ) $ 160,165 Governmental bonds 7,576 - ( 13 ) 7,563 168,038 23 ( 333 ) 167,728 Available-for-sale – matures after one year: Corporate bonds 474,412 9 ( 5,580 ) 468,841 Governmental bonds 13,506 - ( 119 ) 13,387 487,918 9 ( 5,699 ) 482,228 Total $ 655,956 $ 32 $ ( 6,032 ) $ 649,956 As of March 31, 2022 and December 31, 2021 the Company didn’t record an allowance for credit losses for its available-for-sale marketable debt securities. F - 10 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 3: INVENTORIES, NET March 31, 2022 December 31, 2021 Raw materials $ 317,173 $ 247,386 Work in process 16,800 13,863 Finished goods 98,531 118,894 $ 432,504 $ 380,143 NOTE 4: INVESTMENT IN PRIVATELY-HELD COMPANY On January 31, 2021, the Company completed an investment of $ 11,643 in the preferred stock of AutoGrid Systems, Inc. ("AutoGrid"), a privately held company without readily determinable fair values. On February 1, 2021, the Company signed on a preferred stock purchase agreement for an additional investment of $ 5,000 in AutoGrid's preferred stock (the "second investment"). On April 28, 2021, the Company completed the second investment. The Company accounted for the AutoGrid investment as an equity investment that does not have readily determinable fair values. As such, the Company’s non-marketable equity securities had a carrying value of $ 16,643 as of March 31, 2022 and December 31, 2021. Investments in privately-held companies are included within other long-term assets on the consolidated balance sheets. No impairment or other adjustments related to observable price changes in orderly transactions for identical or similar investments were identified for the three months ended March 31, 2022 and 2021. F - 11 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 5: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES To protect against the increase in value of forecasted foreign currency cash flows resulting from salary denominated in the Israeli currency, the New Israeli Shekels (“NIS”), during the three months ended March 31, 2022, the Company instituted a foreign currency cash flow hedging program. The Company hedges portions of the anticipated payroll denominated in NIS for a period of one to nine months with hedging contracts. Accordingly, when the dollar strengthens against the NIS, the decline in present value of future foreign currency expenses is offset by losses in the fair value of the hedging contracts. Conversely, when the dollar weakens, the increase in the present value of future foreign currency cash flows is offset by gains in the fair value of the hedging contracts. These hedging contracts are designated as cash flow hedges, as defined by ASC 815 and are all effective hedges. As of March 31, 2022, the Company entered into forward contracts and put and call options to sell and buy U.S. dollars (“USD”) for NIS in the amount of $ 29 million and $ 44 million, respectively. In addition to the above-mentioned cash flow hedges transactions, the Company also entered into derivative instrument arrangements to hedge the Company’s exposure to currencies other than the U.S. dollar. These derivative instruments are not designated as cash flow hedges, as defined by ASC 815, and therefore all gains and losses, resulting from fair value remeasurement, were recorded immediately in the statement of income, under "Financial expense, net". As of March 31, 2022, the Company entered into forward contracts to sell Australian dollars (“AUD”) for U.S. dollars in the amount of AUD 19 million. As of March 31, 2022, the Company entered into forward contracts to sell Euro for U.S. dollars in the amount of € 29 million. As of March 31, 2022, the Company entered into forward contracts to sell U.S. dollars for South Korean Won in the amount of $ 5,000 . The fair value of derivative assets as of March 31, 2022, and December 31, 2021 was $ 2,042 and $ 4,009 , which was recorded in prepaid expenses and other current assets in the Consolidated Balance Sheets, respectively. The fair value of derivative liabilities as of March 31, 2022, and December 31, 2021 was $ 536 and $ 169 , which was recorded in accrued expenses and other current liabilities in the Consolidated Balance Sheets, respectively. For the three months ended March 31, 2022 and 2021, the Company recorded a gain and in the amount of $ 934 and $ 3,536 , respectively, in "Financial expense, net", related to the derivative instruments not designated as hedging instruments. For the three months ended March 31, 2022 and 2021, the Company recorded an unrealized loss in the amount of $ 1,178 and $ 128 , net of tax effect, respectively, in “Accumulated other comprehensive loss” related to the derivative assets designated as hedging instruments. F - 12 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 6: FAIR VALUE MEASUREMENTS In accordance with ASC 820, the Company measures its cash equivalents and marketable securities, at fair value using the market approach valuation technique. Cash equivalents and marketable securities are classified within Level 1 and Level 2, respectively, because these assets are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Foreign currency derivative contracts are classified within the Level 2 value hierarchy, as the valuation inputs are based on quoted prices and market observable data of similar instruments. The following table sets forth the Company’s assets that were measured at fair value as of March 31, 2022 and December 31, 2021 by level within the fair value hierarchy: Fair value measurements as of Description Fair Value Hierarchy March 31, 2022 December 31, 2021 Assets: Cash equivalents: Money market mutual funds Level 1 $ 603,405 $ 21,680 Derivative instruments asset: Forward contracts designated as hedging instruments Level 2 $ 465 $ 992 Options and forward contracts not designated as hedging instruments Level 2 $ 1,577 $ 3,017 Short-term marketable securities: Corporate bonds Level 2 $ 154,048 $ 160,165 Governmental bonds Level 2 $ 4,509 $ 7,563 Long-term marketable securities: Corporate bonds Level 2 $ 436,713 $ 468,841 Governmental bonds Level 2 $ 12,960 $ 13,387 Liabilities Derivative instruments liability: Options and forward contracts designated as hedging instruments Level 2 $ ( 245 ) $ - Forward contracts not designated as hedging instruments Level 2 $ ( 291 ) $ 169 NOTE 7: WARRANTY OBLIGATIONS Changes in the Company’s product warranty obligations for the three months ended March 31, 2022 and 2021, were as follows: Three Months Ended March 31, 2022 2021 Balance, at the beginning of the period $ 265,160 $ 204,994 Additions and adjustments to cost of revenues 47,907 29,971 Usage and current warranty expenses ( 20,401 ) ( 17,012 ) Balance, at end of the period 292,666 217,953 Less current portion ( 82,340 ) ( 63,443 ) Long term portion $ 210,326 $ 154,510 F - 13 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 8: DEFERRED REVENUES Deferred revenues consist of deferred cloud-based monitoring services, communication services, warranty extension services and advance payments received from customers for the Company’s products. Deferred revenues are classified as short-term and long-term deferred revenues based on the period in which revenues are expected to be recognized. Significant changes in the balances of deferred revenues during the period are as follows: Three Months Ended March 31, 2022 2021 Balance, at the beginning of the period $ 169,345 $ 140,020 Revenue recognized ( 14,529 ) ( 19,786 ) Increase in deferred revenues and customer advances 29,429 22,999 Balance, at the end of the period 184,245 143,233 Less current portion ( 25,511 ) ( 21,065 ) Long term portion $ 158,734 $ 122,168 The following table includes estimated revenues expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2022: 2022 $ 15,468 2023 17,380 2024 8,468 2025 7,506 2026 6,769 Thereafter 128,654 Total deferred revenues $ 184,245 NOTE 9: ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES March 31, 2022 December 31, 2021 Accrued expenses $ 65,903 $ 51,014 Government authorities 27,707 22,631 Operating lease liabilities 14,570 12,728 Provision for legal claims 11,476 11,622 Other 15,295 11,384 $ 134,951 $ 109,379 F - 14 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 10: CONVERTIBLE SENIOR NOTES On September 25, 2020, the Company sold $ 632,500 aggregate principal amount of its 0.00 % convertible senior notes due 2025 (the “Notes”). The Notes were sold pursuant to an indenture, dated September 25, 2020 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee. The Notes do not bear regular interest and mature on September 15, 2025 , unless earlier repurchased or converted in accordance with their terms. The Notes are general senior unsecured obligations of the Company. Holders may convert their Notes prior to the close of business on the business day immediately preceding June 15, 2025 in multiples of $ 1,000 principal amount, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2020 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five-business-day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Notes for each trading day of that five consecutive trading day period was less than 98% of the product of the last reported sale price of the common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events as described in the Indenture. In addition, holders may convert their Notes, in multiples of $1,000 principal amount, at their option at any time beginning on or after June 15, 2025, and prior to the close of business on the second scheduled trading day immediately preceding the stated maturity date of the Notes, without regard to the foregoing circumstances. The initial conversion rate for the Notes was 3.5997 shares of common stock per $ 1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $ 277.80 per share of common stock, subject to adjustment upon the occurrence of certain specified events as set forth in the Indenture . Upon conversion, the Company may choose to pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock. In addition, upon the occurrence of a fundamental change (as defined in the Indenture), holders of the Notes may require the Company to repurchase all or a portion of their Notes, in multiples of $1,000 principal amount, at a repurchase price of 100% of the principal amount of the Notes, plus any accrued and unpaid special interest to, but excluding the fundamental change repurchase date. If certain fundamental changes referred to as make-whole fundamental changes occur, the conversion rate for the Notes may be increased. The Convertible Senior Notes consisted of the following as of March 31, 2022 and December 31, 2021: March 31, 2022 December 31, 2021 Liability: Principal $ 632,500 $ 632,500 Unamortized issuance costs ( 10,237 ) ( 10,965 ) Net carrying amount $ 622,263 $ 621,535 For the three months ended March 31, 2022 and 2021 the Company recorded issuance costs related to the Notes in the amount of $ 728 and $ 724 , respectively. As of March 31, 2022, the issuance costs of the Notes will be amortized over the remaining term of approximately 3.5 years. The annual effective interest rate of the liability component is 0.47 %. As of March 31, 2022, the estimated fair value of the Notes, which the Company has classified as Level 2 financial instruments, is $ 878,985 . The estimated fair value was determined based on the quoted bid price of the Notes in an over-the-counter market on the last trading day of the reporting period. As of March 31, 2022, the if-converted value of the Notes exceeded the principal amount by $ 246,485 . F - 15 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 11: STOCK CAPITAL a. Common stock rights: Common stock confers upon its holders the right to receive notice of, and to participate in, all general meetings of the Company, where each share of common stock shall have one vote for all purposes; to share equally, on a per share basis, in bonuses, profits, or distributions out of fund legally available therefor; and to participate in the distribution of the surplus assets of the Company in the event of liquidation of the Company. b. Secondary public offering: On March 17, 2022, the Company offered and sold 2,300,000 shares of the Company’s common stock, at a public offering price of $ 295.00 per share. The shares of Common Stock were issued and sold pursuant to the underwriting agreement dated March 17, 2022 among the Company, Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC (the “Underwriting Agreement”). All of the offered shares were issued at closing, including 300,000 shares of Common Stock that were issued and sold pursuant to the underwriters’ option to purchase additional shares under the Underwriting Agreement, which was exercised in full on March 18, 2022. The shares of Common Stock were issued and sold pursuant to the Company’s Registration Statement on Form S-3, which became effective upon filing with the Securities and Exchange Commission on February 22, 2022, the related prospectus dated February 22, 2022, and the prospectus supplement dated March 17, 2022. The net proceeds to the Company after underwriters' discounts and commissions of $ 27,140 and $ 834 of offering costs was $ 650,526 . c. Equity Incentive Plans: The Company’s 2007 Global Incentive Plan (the “2007 Plan”) was adopted by the board of directors on August 30, 2007. The 2007 Plan terminated upon the Company’s IPO on March 31, 2015 and no further awards may be granted thereunder. All outstanding awards will continue to be governed by their existing terms and 379,358 available options for future grant were transferred to the Company’s 2015 Global Incentive Plan (the “2015 Plan”) and are reserved for future issuances under the 2015 plan. The 2015 Plan became effective upon the consummation of the IPO. The 2015 Plan provides for the grant of options, restricted stock units ("RSU"), performance stock units ("PSU"), and other share-based awards to directors, employees, officers and non-employees of the Company and its subsidiaries. As of March 31, 2022, a total of 18,047,085 shares of common stock were reserved for issuance pursuant to stock awards under the 2015 Plan (the “Share Reserve”). The Share Reserve will automatically increase on January 1 st of each year during the term of the 2015 Plan, commencing on January 1 st of the year following the year in which the 2015 Plan becomes effective, in an amount equal to 5 % of the total number of shares of capital stock outstanding on December 31 st of the preceding calendar year; provided, however, that the Company’s board of directors may determine that there will not be a January 1 st increase in the Share Reserve in a given year or that the increase will be less than 5% of the shares of capital stock outstanding on the preceding December 31 st . The Company granted under its 2015 Plan, PSU awards to certain employees and officers which vest upon the achievement of certain performance or market conditions subject to their continued employment with the Company. The market condition for the PSUs is based on the Company’s total shareholder return ("TSR") compared to the TSR of companies listed in the S&P 500 index over a one to three year performance period. The Company uses a Monte-Carlo simulation to determine the grant date fair value for these awards, which takes into consideration the market price of a share of the Company’s common stock on the date of grant less the present value of dividends expected during the requisite service period, as well as the possible outcomes pertaining to the TSR market condition. The Company recognizes such compensation expenses on an accelerated vesting method. F - 16 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 11: STOCK CAPITAL (Cont.) The aggregate maximum number of shares of common stock that may be issued on the exercise of incentive stock options is 10,000,000 . As of March 31, 2022, an aggregate of 8,617,974 options are still available for future grant under the 2015 Plan. A summary of the activity in stock options and related information is as follows: Number of options Weighted average exercise price Weighted average remaining contractual term in years Aggregate intrinsic Value Outstanding as of December 31, 2021 474,280 $ 44.68 5.22 $ 112,479 Exercised ( 51,759 ) 28.55 - 15,142 Forfeited or expired ( 243 ) 5.01 - - Outstanding as of March 31, 2022 422,278 $ 46.63 5.04 $ 114,987 Vested and expected to vest as of March 31, 2022 420,193 $ 46.36 5.45 $ 115,977 Exercisable as of March 31, 2022 342,083 $ 31.86 4.99 $ 99,379 The aggregate intrinsic value in the tables above represents the total intrinsic value (the difference between the fair value of the Company’s common stock as of the last day of each period and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last day of each period. A summary of the activity in the RSUs and related information is as follows: Number of RSUs Weighted average grant date fair value Unvested as of December 31, 2021 1,759,972 $ 189.25 Granted 94,839 312.32 Vested ( 218,992 ) 118.04 Forfeited ( 44,567 ) 204.02 Unvested as of March 31, 2022 1,591,252 $ 185.66 A summary of the activity in the PSUs and related information is as follows: Number of PSUs Weighted average grant date fair value Unvested as of December 31, 2021 108,595 $ 296.40 Granted 54,964 209.33 Unvested as of March 31, 2022 163,559 $ 267.14 d. Employee Stock Purchase Plan: The Company adopted an ESPP effective upon the consummation of the IPO. As of March 31, 2022, a total of 3,662,737 shares were reserved for issuance under this plan. The number of shares of common stock reserved for issuance under the ESPP will increase automatically on January 1st of each year, for ten years, by the lesser of 1 % of the total number of shares of the Company’s common stock outstanding on December 31st of the preceding calendar year or 487,643 shares. However, the Company’s board of directors may reduce the amount of the increase in any particular year at their discretion, including a reduction to zero. F - 17 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 11: STOCK CAPITAL (Cont.) The ESPP is implemented through an offering every six months. According to the ESPP, eligible employees may use up to 15 % of their salaries to purchase common stock up to an aggregate limit of $ 15 per participant for every six months plan. The price of an ordinary share purchased under the ESPP is equal to 85 % of the lower of the fair market value of the ordinary share on the subscription date of each offering period or on the purchase date. As of March 31, 2022, 661,827 shares of common stock had been purchased under the ESPP. As of March 31, 2022, 3,000,910 shares of common stock were available for future issuance under the ESPP. In accordance with ASC No. 718, the ESPP is compensatory and, as such, results in recognition of compensation cost. e. Stock-based compensation expenses: The Company recognized stock-based compensation expenses related to all stock-based awards in the consolidated statement of income for the three months ended March 31, 2022, and 2021, as follows: Three Months Ended March 31, 2022 2021 Cost of revenues $ 5,062 $ 5,790 Research and development 14,985 8,798 Selling and marketing 6,701 5,435 General and administrative 7,359 3,130 Total stock-based compensation expenses $ 34,107 $ 23,153 The total tax benefit associated with share-based compensation for the three months ended March 31, 2022 and 2021 was $ 3,478 and $ 4,397 , respectively. The tax benefit realized from share-based compensation for three months ended March 31, 2022 and 2021 was $ 2,927 and $ 2,749 , respectively. As of March 31, 2022, there were total unrecognized compensation expenses in the amount of $ 308,373 related to non-vested equity-based compensation arrangements granted under the Company’s plans and non-plan awards. These expenses are expected to be recognized during the period from April 1, 2022 through October 31, 2026. F - 18 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 12: COMMITMENTS AND CONTINGENT LIABILITIES a. Guarantees: As of March 31, 2022, contingent liabilities exist regarding guarantees in the amounts of $ 6,284 and $ 1,541 in respect of office rent lease agreements and other transactions, respectively. b. Contractual purchase obligations: The Company has contractual obligations to purchase goods and raw materials. These contractual purchase obligations relate to inventories and other purchase orders, which cannot be canceled without penalty. In addition, the Company acquires raw materials or other goods and services, including product components, by issuing authorizations to its suppliers to purchase materials based on its projected demand and manufacturing needs. As of March 31, 2022, the Company had non-cancelable purchase obligations totaling approximately $ 1,426,689 , out of which the Company recorded a provision for loss in the amount of $ 4,745 . As of March 31, 2022, the Company had contractual obligations for capital expenditures totaling approximately $ 144,201 . These commitments reflect purchases of automated assembly lines and other machinery related to the Company’s manufacturing process as well as capital expenditures associated with the construction of Sella 2, the Company’s planned second lithium-ion cell and battery factory in Korea. c. Legal claims: From time to time, the Company may be involved in various claims and legal proceedings. The Company reviews the status of each matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss. These accruals are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. In September 2018, the Company’s German subsidiary, SolarEdge Technologies GmbH received a complaint filed by competitor SMA Solar Technology AG (“SMA”). The complaint, filed in the District Court Düsseldorf, Germany, alleges that SolarEdge's 12.5kW - 27.6kW inverters infringe two of the plaintiff’s patents. SMA asserted a value in dispute of EUR 5.5 million (approximately $ 6,102 ) for both patents. The Company challenged the validity of both patents. With respect to one of the claims, in October 2020, the German Patent Court rendered the SMA patent invalid and this invalidity has been appealed by SMA. With respect to the other claim, in November 2019, the first instance court stayed the infringement proceedings since it considered it to be highly likely that the second SMA patent would also be rendered invalid. The Company believes that it has meritorious defenses to the claims asserted and intends to vigorously defend against the remaining lawsuit. In May 2019, the Company’s two Chinese subsidiaries and its equipment manufacturer in China were served with three lawsuits by Huawei Technologies Co., Ltd., a Chinese entity (“Huawei”). The lawsuits, filed in the Guangzhou intellectual property court, alleged infringement of three patents and asked for an injunction of manufacture, use, sale and offer for sale, and damage awards. A first-instance judgment was issued on August 7, 2020 ordering the three defendants to collectively pay damages in the amount of approximately Chinese Yuan (“CNY”) 10.5 million (approximately $ 1,658 ), including court fees. The Company has filed an appeal with the Supreme People’s Court of China. The Company's appeal to the Supreme People's Court was denied in December of 2021, rendering a payment by us to Huawei in an amount of $ 1,658 . The judgement has not been enforced. In addition, in January 2021, Huawei filed a motion to increase its claimed monetary damages to CNY 50.5 million (approximately $ 7,975 ) with respect to the second lawsuit. In February 2021, a preliminary injunction was rendered by the Guangzhou intellectual property court with respect to such second lawsuit and applying to seven inverter models. In line with the court’s mandate, the Company took immediate action to make software changes to meet the court order. In addition, in February 22, 2021 a first-instance judgment was issued ordering payment of damages in the amount of CNY 50.5 million (approximately $ 7,975 ), including court fees, with respect to the second patent. The Company appealed this judgement with the Supreme People’s Court which case is still pending. The first instance court’s judgement is not effective or enforceable pending the appeal. In October 2021, a first-instance judgment was issued ordering to pay damages in the amount of approximately CNY 10.5 million (approximately $ 1,658 ), including court fees, with respect to the third lawsuit. The Company has filed an appeal with the Supreme People’s Court of China which also is still pending. The first instance court’s judgement is not effective or enforceable pending the appeal. The Company believes that it has meritorious defenses to the claims asserted by Huawei. In December 2019, the Company received a lawsuit filed by a former consultant of the Company and its Israeli subsidiary in the amount of NIS 25.5 million (approximately $ 8,029 ) claiming damages caused relating to a terminated consulting agreement and stock options therein. The Company believes it has meritorious defenses to the claims asserted and intends to vigorously defend against this lawsuit. As of March 31, 2022, accrued amounts for legal claims of $ 11,476 were recorded in accrued expenses and other current liabilities. F - 19 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 13: ACCUMULATED OTHER COMPREHENSIVE LOSS The following table summarizes the changes in accumulated balances of other comprehensive gain (loss), net of taxes: Three Months Ended March 31, 2022 2021 Unrealized gains (losses) on available-for-sale marketable securities Beginning balance $ ( 4,709 ) $ 240 Revaluation ( 12,721 ) ( 1,468 ) Tax on revaluation 2,471 283 Other comprehensive loss before reclassifications ( 10,250 ) ( 1,185 ) Reclassification 844 - Tax on reclassification ( 100 ) - Losses reclassified from accumulated other comprehensive income 744 - Net current period other comprehensive loss ( 9,506 ) ( 1,185 ) Ending balance $ ( 14,215 ) $ ( 945 ) Unrealized gains (losses) on cash flow hedges Beginning balance $ 874 $ - Revaluation ( 1,337 ) ( 146 ) Tax on revaluation 159 18 Other comprehensive loss before reclassifications ( 1,178 ) ( 128 ) Reclassification 565 - Tax on reclassification ( 67 ) - Losses reclassified from accumulated other comprehensive loss 498 - Net current period other comprehensive loss ( 680 ) ( 128 ) Ending balance $ 194 $ ( 128 ) Foreign currency translation adjustments on intra-entity transactions that are of a long-term investment in nature Beginning balance $ ( 17,420 ) $ - Revaluation ( 6,983 ) ( 3,675 ) Tax on revaluation - - Other comprehensive loss before reclassifications ( 6,983 ) ( 3,675 ) Net current period other comprehensive loss ( 6,983 ) ( 3,675 ) Ending balance $ ( 24,403 ) $ ( 3,675 ) Unrealized gains (losses) on foreign currency translation Beginning balance $ ( 6,064 ) $ 3,617 Revaluation ( 1,579 ) ( 5,630 ) Tax on revaluation - - Other comprehensive loss before reclassifications ( 1,579 ) ( 5,630 ) Net current period other comprehensive loss ( 1,579 ) ( 5,630 ) Ending balance $ ( 7,643 ) $ ( 2,013 ) Total $ ( 46,067 ) $ ( 6,761 ) F - 20 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 13: ACCUMULATED OTHER COMPREHENSIVE LOSS (Cont.) The following table summarizes the changes in "Accumulated other comprehensive loss", net of taxes: Details about Accumulated Other Comprehensive Loss Components Three Months Ended March 31, Affected Line Item in the Statement of Income 2022 2021 Unrealized losses on available-for-sale marketable securities $ ( 844 ) $ - Financial expense, net 100 - Income taxes $ ( 744 ) $ - Total, net of income taxes Unrealized losses on cash flow hedges, net ( 67 ) - Cost of revenues ( 338 ) - Research and development ( 71 ) - Sales and marketing ( 89 ) - General and administrative $ ( 565 ) $ - Total, before income taxes 67 - Income taxes ( 498 ) - Total reclassifications for the period $ ( 1,242 ) $ - F - 21 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 14: EARNINGS PER SHARE The following table presents the computation of basic and diluted EPS: Three Months Ended March 31, 2022 2021 Basic EPS: Numerator: Net income $ 33,123 $ 30,076 Denominator: Shares used in computing net earnings per share of common stock, basic 53,134,937 51,726,998 Diluted EPS: Numerator: Net income attributable to common stock, basic $ 33,123 $ 30,076 Notes due 2025 553 534 Net income attributable to common stock, diluted $ 33,676 $ 30,610 Denominator: Shares used in computing net earnings per share of common stock, basic 53,134,937 51,726,998 Notes due 2025 2,276,818 2,276,818 Effect of stock-based awards 903,438 1,993,320 Shares used in computing net earnings per share of common stock, diluted 56,315,193 55,997,136 No shares were excluded from the calculation for the three months ended March 31, 2022 and 2021. NOTE 15: OTHER OPERATING EXPENSES In the three months ended March 31, 2021, the Company recorded a write-off of long-lived assets in the amount of $ 2,209 . NOTE 16: INCOME TAXES The effective tax rate for the three months ended March 31, 2022 and 2021 was 27.1 % and 20.9 %, respectively. The increase in the effective tax rate in the three months ended March 31, 2022, is primarily due to a different allocation of income among the Company’s US, Israeli, and foreign subsidiaries and the change to Section 174 of the U.S Internal Revenue Code, which went into effect on January 1, 2022. The change eliminates the option to deduct research and development expenditures currently and requires taxpayers to amortize them over five years (if generated from a US entity) and fifteen years (if generated from non-US entities). This change resulted in an increase in the Company’s taxable income and Global Intangible Low Taxed Income (“GILTI”) tax. As of March 31, 2022, and December 31, 2021, unrecognized tax benefits were $ 2,303 and $ 2,192 , respectively. If recognized, such benefits would favorably affect the Company’s effective tax rate. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The total amount of penalties and interest were immaterial as of March 31, 2022, and December 31, 2021. F - 22 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 17: SEGMENT, GEOGRAPHIC AND PRODUCT INFORMATION (Cont.) The Company operates in five different operating segments: Solar, Energy Storage, e-Mobility, Critical Power and Automation Machines. The Company's Chief Executive Officer, who is the chief operating decision maker (“CODM”), makes resource allocation decisions and assesses performance based on financial information presented on a consolidated basis, accompanied by disaggregated information about revenues and contributed profit by the operating segments. The Company does not allocate to its operating segments revenue recognized due to advance payments received for performance obligations that extend for a period greater than one year, related to Accounting Standard Codification 606, “Revenue from Contracts with Customers” (ASC 606). Segment profit is comprised of gross profit for the segment less operating expenses that do not include amortization of purchased intangible assets, stock based compensation expenses and certain other items. The Company manages its assets on a group basis, not by segments, as many of its assets are shared or co-mingled. The Company’s CODM does not regularly review asset information by segments and, therefore, the Company does not report asset information by segment. The Company identified one operating segment as reportable – the Solar segment. The other operating segments are insignificant individually and therefore their results are presented together under “All other”. The Solar segment includes the design, development, manufacturing, and sales of an intelligent inverter solution designed to maximize power generation at the individual PV module level and a residential storage solution, compatible with the Company’s energy hub inverter, intended to store and supply power for back-up and to maximize self-consumption. The Solar segment solution consists mainly of the Company’s power optimizers, inverters, batteries and cloud‑based monitoring platform. The “All other” category includes the design, development, manufacturing and sales of energy storage products, e-Mobility products, UPS products and automated machines. The following table presents information on reportable segments profit (loss) for the period presented: Three Months Ended March 31, 2022 2021 Solar All other Solar All other Revenues $ 607,997 $ 46,948 $ 376,287 $ 29,116 Cost of revenues 424,500 44,341 226,833 30,483 Gross profit (loss) 183,497 2,607 149,454 ( 1,367 ) Research and development $ 43,131 $ 7,930 31,902 6,265 Sales and marketing 25,805 2,574 18,742 2,497 General and administrative 15,849 3,625 13,272 3,501 Segments profit (loss) $ 98,712 $ ( 11,522 ) $ 85,538 $ ( 13,630 ) F - 23 SOLAREDGE TECHNOLOGIES INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (in thousands, except per share data) NOTE 17: SEGMENT, GEOGRAPHIC AND PRODUCT INFORMATION The following table presents information on reportable segments reconciliation to consolidated revenues for the periods presented: Three Months Ended March 31, 2022 2021 Solar revenues $ 607,997 $ 376,287 All other revenues 46,948 29,116 Revenues from services ASC 606 135 86 Consolidated revenues $ 655,080 $ 405,489 The following table presents information on reportable segments reconciliation to consolidated operating income for the periods presented: Three Months Ended March 31, 2022 2021 Solar segment profit $ 98,712 $ 85,538 All other segment loss ( 11,522 ) ( 13,630 ) Segments operating profit 87,190 71,908 Amounts not allocated to segments: Stock based compensation expenses ( 34,107 ) ( 23,153 ) Other unallocated expenses ( 2,219 ) ( 4,627 ) Consolidated operating income $ 50,864 $ 44,128 F - 24